Czech Growth Forecast revised Up

The Czech Finance Ministry has said today that it expects the economy to grow faster than originally expected this year as tax cuts and an inflow of funds from the European Union should boost economic activity. The ministry forecast gross domestic product to expand 4.9 percent, compared with a January estimate of 4.7 percent. It left its prediction for 2009 GDP growth at 5.1 percent. The economy grew a record 6.5percent last year.

The Jan. 1 introduction of a flat rate income tax and measures restricting social and health-care expenses should help ofset a growing shortage of workers and the negative effect the fastest inflation in 10 years on household spending, the ministry said. It raised its forecast for the average inflation rate to 6 percent from 5.5 percent in the previous forecast.

``The Czech Republic will remain a dynamically developing economy, attractive for foreign investors'' and ``the positive effects of fiscal reform and inflow of EU funds will be gradually seen,'' the ministry said. ``Reforms underway will reduce limiting factors and contribute to acceleration of economic growth.''

The Czech Republic may receive as much as 26.7 billion euros ($42.4 billion) from the EU in the period of 2007 to 2013.

The koruna is expected to weaken from the current levels to an average 25.8 against the euro this year before it rises to 25.4 a year later, the ministry estimated. The currency was at 25.052 per euro as of 5:52 p.m. in Prague, compared with 25.045 yesterday.

The unemployment rate will fall to 4.2 percent in 2008 and 3.6 percent in 2009, the ministry said, citing the government's measures adopted on Jan. 1, including a cancellation of automatic indexation of social payments that should prompt people to take a job rather than stay on welfare.



``Reform measures in public finances should lead to higher motivation to work by strengthening net earned incomes at the expense of social benefits, contributing thus to labor market recovery,'' the ministry said.

The current-account deficit is anticipated to represent 3 percent of GDP this year as the economy will generate a record full-year trade surplus of 111 billion koruna, according to the authority. The current-account gap will shrink to 2.1 percent of GDP in 2009, the ministry said.

The Czech budget deficit will continue to narrow to 1.5 percent of GDP this year from 1.6 percent in 2008, the ministry reiterated an estimate from April 21.